Tuesday, June 7, 2011

The NLRB Attacks Competitive Federalism

Commissar for the Ministry of 787 Dreamliner Production?

The National Government is at it again, interfering with the workings of competitive federalism. That is, the general counsel of the National Labor Relations Board, Mr. Lafe Solomon (pictured above) has issued a complaint against Boeing, claiming that the firm has engaged in unfair labor practices. As a remedy, the complaint seeks an order to compell the firm to increase its production of 787 Dreamliners at facilities in the State of Washington, above and beyond current levels of production. In particular, the complaint alleges that Boeing chose to open a second production line for the 787 in South Carolina and to create numerous jobs (over 2000 according to one report) in that state in order to punish the members of The International Association of Machinists and Aerospace Workers, which called two strikes against Boeing in the past six years. (No one disputes that an eight week strike in 2008, for instance, cost Boeing $100 million per day in deferred revenue. For additional details on how the IAMAW has disrupted Boeing's operations and made its product less attractive to potential buyers, see this Op-Ed by Steve Chapman of the Chicago Tribune.) Such an allegedly punitive act, the NLRB says, violates federal labor law, even though the new facility would entail an increase in production of Boeing's 787, that is, would not move any production from Washington to South Carolina. Indeed, one former Chair of the National Labor Relations Board has opined that the complaint is unprecedented, given that Boeing is not moving existing work being done in Washington to South Carolina. Moreover, Boeing has itself exposed numerous inaccuracies in the NLRB's complaint and post-complaint statements, leaving one to wonder whether the NLRB will simply withdraw the complaint and correct the record. Finally, Boeing's answer to the NLRB's complaint points out that there were any number of reasons that motivated Boeing's decision to open a production line in South Carolina, including a desire for geographic diversity in the firm's production facilities and South Carolina's overall favorable business climate.

South Carolina, of course, is a so-called "right to work state," and employees at the new factory would not be members of the IAMAW or any other union. As previously explained on this blog, Congress, via the Taft-Hartley Act of 1947, altered American Labor Law, by empowering states to opt-out of portions of the National Labor Relations Act (NLRA) of 1935. Under the original NLRA, unions --- best characterized as labor cartels --- could use their bargaining power to force employers to to enter "closed shop" agreements. Under such agreements, an employee had no choice but to join a union and thus support the union financially if he or she wished to work for the company in question. Indeed, such agreements require firms to fire individuals who quit a union or refuse to pay their dues. Thus, by exempting unions from the antitrust laws and requiring private firms to recognize unions, federal labor law bolsters arrangements that coercively deprive individuals of their freedom of association, that is, their freedom not to join a union. This result is supremely ironic, as it turns the purpose of government on its head. For, as explained in an earlier post on this blog, the purpose of government, at least according to James Madison, is the protection of faculties of acquiring property, including occupational liberty. As Madison put it, in his 1792 Essay on Property:

"That is not a just government, nor is property secure under it, where arbitrary restrictions, exemptions, and monopolies deny to part of its citizens that free use of their faculties, and free choice of their occupations, which not only constitute their property in the general sense of the word; but are the means of acquiring property strictly so called."

A state-backed closed-shop arrangement is just such an "arbitrary restriction" that denies citizens a free use of their faculties.

The Taft-Hartley Act, by contrast, allows a state to declare itself a "Right to Work" jurisdiction, thereby outlawing "closed shop" agreements. A state that chooses this course ensures that individuals may pursue the occupation of their choice without being forced to join and financially support an organization they may dislike or, worse, believe to be contrary to their economic interest. Moreover, as a practical economic matter, union organization is less likely in right to work states, because a union that successfully organizes a particular workforce cannot be sure than any more than a bare majority of a firm's employees will financially support the union.

In our federal system, firms and individuals are free to incorporate where they wish and also free to locate their facilities where they wish. Combined with the NLRA, the Taft-Hartley Act authorizes two different frameworks for labor relations from which firms can choose when they select their locations. Presumably competition between these two frameworks, just like competition on other attributes that make for a healthy business environment, will result in firms locating their production facilities in those states that offer the overall best business climate. If, as some have argued, coercive unionization makes workers more productive and thus facilitates wealth creation, then choosing "right to work" status will deter investment in a particular state, other things being equal. (For instance, some claim that such coercion is necessary to prevent non-union employees from "free riding" on the efforts of unions to raise a firm's wages.) If, on the other hand, coercive unionization imposes more costs than benefits, then a state's choice as a "right to work state" will, other things being equal, attract capital investment and jobs. That is to say, "competition between states" will decide which of two possible institutional frameworks survives. In fact, it may be that one framework is superior for certain firms, while another is superior for others. That's the way federalism is supposed to work.

The NLRB's order, however, short circuits that process, at least in part. Under the rule sought by the NLRB, a firm that suffers at the hands of one or more costly strikes will find it difficult to open a new facility elsewhere, as a fact finder could always infer, perhaps quite reasonably, that the firm has opened the new facility in a different state at least in part "because" it wants to avoid the debilitating consequences of a future strike. And, having drawn this inference, the next logical inference will be that the firm firm opened the new facility to "punish" the union for striking, perhaps supported --- like the NLRB's current complaint --- by some offhand statements by company officials taken out of context. Indeed, the more costly the prior strike, the stronger will be the inference that any subsequent move is a form of retaliation! While the company might ultimately prevail, it will do so only after bearing significant costs in the form of litigation and uncertainty.

Aside from short-circuiting federalism, the NLRB's approach will, if validated in court, have other negative consequences as well. For one thing, the rule will encourage otherwise unwarranted strikes by unions that fear employers might be planning --- quite lawfully --- to build facilities elsewhere, even if those plans have nothing to do with organized labor. (Perhaps a firms is considering a move to a state with less onerous taxes or environmental regulation, for instance.) By striking today, a union would thereby give itself the option down the road to argue that any construction of new facilities in another state is retaliation for the recent strike. Moreover, the prospect that unions might behave in this manner, or otherwise take advantage of the NLRB's unprecedented rule, will cause companies to resist unionization more vigorously than they otherwise might, even if unionization would make sense for all concerned. Indeed, at the margin, firms might avoid closed-shop states altogether to avoid the NLRB's new rule.

Hopefully the courts will reject the NLRB's effort to short-circuit the workings of competitive federalism. Indeed, they may not even reach the issue, as Senators have already introduced legislation to clarify labor law in a way that rejects the NLRB's gambit.

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Bishop James Madison

Portrait of Bishop James Madison

Who Was Bishop Madison ?

Bishop James Madison, the cousin of our nation's fourth President, was the President of the College of William and Mary from 1777 until his death in 1812. Prior to appointment as President, Madison served as a professor of natural philosophy and mathematics. During the Revolutionary War, Madison organized a militia company of students. William and Mary claims that Madison was the first professor of Political Economy in the United States. His lectures on the subject relied upon Adam Smith's Wealth of Nations, published in 1776. Along with Thomas Jefferson, Madison was instrumental in founding the School of Law at William and Mary, appointing George Wythe as William and Mary's first Professor of Law and Police.